If it was repaid at the *end* of the year in one lump sum, it is my understanding that would be 5%. If they give you 2000 at 5% and you pay them back at the end of the year 2100, that is 5%. You had use of the money the entire year. BUT because you are repaying monthly, you are paying them back both interest and principal. So in month one you've borrowed 2000 for the year. But in month two, you don't owe them 2000 any more, right? You already paid some of it back - which they can now lend to someone else. (they have use of the money). But if you've paid them some of the principle back, you don't "owe" interest on that part anymore because you aren't borrowing that portion of it anymore. But if you aren't borrowing that part anymore, why the heck are they charging you 5% on that part still? They have it back. However, they continue to charge you interest on money you've already put back in their pocket and turn around and do the same thing to someone else! Or something along those lines.